GBP USD Exchange Rate: The Week Ahead October 25th

GBP USD Exchange Rate: The Week Ahead October 24th

The GBP USD rate meandered between the 1.37 and 1.38 levels on Friday, amid data showing that business activity was robust on both sides of the Atlantic in October – before settling at the 1.37 mid-range over the weekend.

The pair broke through the 1.38 barrier for the first time since mid-September earlier in the week, after the pound was propelled higher by Bank of England (BoE) interest rate expectations.

Market analysts expect the central bank to increase the cost of borrowing to curb inflation, possibly as early as next month – expectations that weren’t dampened by soft UK price data on Wednesday.

Data-fuelled headwinds provided a brief reality check for the pound on Friday, namely a sharp drop in consumer sentiment and falling retail sales.

Interest rate speculation in focus for the pound

In the absence of influential economic indicators from the UK economy this week, the pound’s direction will be driven by news headlines.

Last week concluded with the BoE’s new chief economist Huw Pill predicting that inflation in the UK could rise above 5% by early next year.

Speaking to the Financial Times, Pill said: “I would not be shocked — let’s put it that way — if we see an inflation print close to or above 5% (in the months ahead). And that’s a very uncomfortable place for a central bank with an inflation target of 2% to be,”

Pill added that the central bank’s monetary policy committee (MPC) was “finely balanced” over whether to hike interest rates at its November meeting and that it would be a “live” decision.

Investors will be keeping their eyes peeled for further evidence this week that the BoE could hike interest rates as soon as next month.

Therefore, a planned address on Monday by Silvana Tenreyro – who recently pushed back against rate rises – will be closely monitored for further signals from the MPC member.

Dollar awaits further monetary policy signals

The embattled dollar could receive much-need support from rising bond yields on the back of firmer inflation expectations in the coming days.

Rising expectations that the US Federal Reserve will be among the first major central banks to tighten monetary policy could provide the dollar with a boost.

The Fed has indicated that it could begin tapering stimulus as soon as next month, with interest rate hikes on the horizon late next year. Full employment is among the US central bank’s requirements before it hikes rates – a condition that could be realised following data on Thursday that showed US jobless claims fell to a 19-month low.

On Friday, Chair Jerome Powell signalled that the Fed is on course to begin winding in its bond-buying programme and inflation should recede once supply-chain constraints pushing up prices ease.

Speaking during a panel discussion at a virtual event hosted by the South African Reserve Bank, Powell said: “We are on track to begin a taper of our asset purchases that, if the economy evolves broadly as expected, will be completed by the middle of next year,”

“I do think it is time to taper and I don’t think it is time to raise rates.”